Multimarket contact and price discrimination

Abstract

Theoretical and empirical studies have demonstrated that multimarket contact facilitates tacit collusion and higher prices. In this study, we examine how multimarket contact influences firms' use of price discrimination. First, we demonstrate theoretically that additional coordination can lead firms to increase or reduce price discrimination, depending on underlying market factors. Next, we empirically investigate price differentials in the U.S. airline industry, employing a new instrumental variables approach to isolate the effects of multimarket contact. We find that multimarket contact results in larger differences in fare levels amongst consumers purchasing higher-priced tickets but smaller fare differences amongst those purchasing lower-priced tickets. Consistent with our theoretical model, multimarket contact more strongly influences fares on less concentrated routes. The findings emphasize the importance of accounting for cross-market or network structure as well as within-market structure when modeling market conduct and performance or when evaluating potential merger effects.